Week 4 - Miles A. Zachary, Ph.D. || Homepage

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EVALUATING A COMPANY’S
RESOURCES, COST POSITION, AND
COMPETITIVENESS
Chapter 4
MGT 4380
Strategic Management Process
Where are we now?
Two facets of the company’s situation
The industry and competitive environments in
which the company operates—its external
environment
The company’s resources and organizational
capabilities—its internal environment
Resource strengths and weaknesses
Cost position
Culture and the strength of its leadership
Where are we now?
Question 1
How well is the firm’s strategy working?
Question 2
What are the firm’s competitively important
resources and capabilities?
Question 3
Are the firm’s cost structure and customer
value proposition competitive?
Question 4
Is the firm competitively stronger or weaker
than key rivals?
Question 5
What strategic issues and problems merit
front-burner managerial attention?
Question 1: How Well Is the Company’s
Strategy Working?
The two best indicators of how well a firm’s
strategy is working are:
Whether the firm is recording gains in financial
strength and profitability
Whether the firm’s competitive strength and
market standing is improving
Performance Indicators
Easier to measure (financial measures)
Trends in the firm’s sales and earnings growth
E.g., sales growth, COGS, net earnings, etc.
Trends in the firm’s stock price
E.g., stock price, P/E ratio, volatility, etc.
The firm’s overall financial strength
E.g., current/quick ratios, DuPont ratios, debt-to-equity/assets, cash flow ratio, etc.
Harder to measure (strategic measures)
The firm’s customer retention rate
The rate at which new customers are acquired
Changes in the firm’s image and reputation with customers
Evidence of improvement in internal processes such as defect rate, order fulfillment,
delivery times, days of inventory, and employee productivity
Performance Indicators
Financial Measures Exercise
Using Nike, Inc.’s 2013 10-K report, calculate the following performance
indicators:
1)
2)
3)
4)
5)
Net Profit Margin
Asset Turnover
Current Ratio
Quick Ratio (Acid Test)
P/E Ratio
Performance Indicators
Financial Measures Exercise
Using Nike, Inc.’s 2013 10-K report, calculate the following performance
indicators:
1)
2)
3)
4)
5)
Net Profit Margin = $2,485 / $25,313 = 0.0982 or 9.82%
Asset Turnover
Current Ratio
Quick Ratio (Acid Test)
P/E Ratio
Performance Indicators
Financial Measures Exercise
Using Nike, Inc.’s 2013 10-K report, calculate the following performance
indicators:
1)
2)
3)
4)
5)
Net Profit Margin = $2,485 / $25,313 = 0.0982 or 9.82%
Asset Turnover = $25,313 / $17,584 = 1.44
Current Ratio
Quick Ratio (Acid Test)
P/E Ratio
Performance Indicators
Financial Measures Exercise
Using Nike, Inc.’s 2013 10-K report, calculate the following performance
indicators:
1)
2)
3)
4)
5)
Net Profit Margin = $2,485 / $25,313 = 0.0982 or 9.82%
Asset Turnover = $25,313 / $17,584 = 1.44
Current Ratio = $13,626 / $ 3,926 = 3.47
Quick Ratio (Acid Test)
P/E Ratio
Performance Indicators
Financial Measures Exercise
Using Nike, Inc.’s 2013 10-K report, calculate the following performance
indicators:
1)
2)
3)
4)
5)
Net Profit Margin = $2,485 / $25,313 = 0.0982 or 9.82%
Asset Turnover = $25,313 / $17,584 = 1.44
Current Ratio = $13,626 / $ 3,926 = 3.47
Quick Ratio (Acid Test) = ($3,337 + $3,434) / $3,926 = 1.73
P/E Ratio
Performance Indicators
Financial Measures Exercise
Using Nike, Inc.’s 2013 10-K report, calculate the following performance
indicators:
1)
2)
3)
4)
5)
Net Profit Margin = $2,485 / $25,313 = 0.0982 or 9.82%
Asset Turnover = $25,313 / $17,584 = 1.44
Current Ratio = $13,626 / $ 3,926 = 3.47
Quick Ratio (Acid Test) = ($3,337 + $3,434) / $3,926 = 1.73
P/E Ratio = $72.59 / $3.13 = 23.19
Question 2: What Are the Company’s Competitively
Important Resources and Capabilities?
Resources—general assets possessed by a firm
Tangible resources—physical resources that can be readily seen,
touched, and/or quantified
Plant, property, and equipment, cash, etc.
Intangible resources—non-physical resources that can be difficult to
quantify or be seen
Patents, trademarks, “secret family recipes”, etc.
Capabilities—what organizations can do based on what
resources they possess
New product development, customer service, etc.
Dynamic capabilities—a unique ability to create new capabilities; ability
to “update” capabilities
Common Types of Tangible and Intangible Resources
Tangible Resources
Physical resources
State-of-the-art manufacturing plants and equipment, efficient
distribution facilities, attractive real estate locations, or ownership of
valuable natural resource deposits
Financial
resources
Cash and cash equivalents, marketable securities, and other financial
assets such as a company’s credit rating and borrowing capacity
Technological
assets
Patents, copyrights, superior production technology, and technologies
that enable activities
Organizational
resources
Information and communication systems (servers, workstations, etc.),
proven quality control systems, and strong network of distributors or
retail dealers
Common Types of Tangible and Intangible Resources
Intangible Resources
Human assets and
intellectual capital
An experienced and capable workforce, talented employees in key
areas, collective learning embedded in the organization, or proven
managerial know-how
Brand, image, and
reputational assets
Brand names, trademarks, product or company image, buyer
loyalty, and reputation for quality, superior service
Relationships
Alliances or joint ventures that provide access to technologies,
specialized know-how, or geographic markets, and trust
established with various partners
Company culture
The norms of behavior, business principles, and ingrained beliefs
within the company
Question 2: What Are the Company’s Competitively
Important Resources and Capabilities?
A company’s strategy and business model:
Must be well-matched to its collection of
resources and capabilities
Is strengthened when exploiting resources that
are competitive
But what makes a resource or capability
competitive?
Question 2: What Are the Company’s Competitively
Important Resources and Capabilities?
The Resource-Based View (RBV)
Firms are constantly seeking to gain advantage and to
translate that advantage into earnings.
Firms must appear more attractive than other options in
the eyes of customers at the moment that customers
decide to purchase.
To do this, firms make deliberate decisions about the
procurement, development, and deployment of assets
and resources used to produce advantage.
Resource-Based View (RBV)
The RBV holds that competitive advantage emerges
from resources and capabilities that meet four
criteria:
Value
Rarity
Inimitability
Non-substitutability
Resource-Based View (RBV)
Value
Valuable resources are resources that consumers
desire or resources that give a firm an ability to
produce products and services that consumers
want
A good location for a retail outlet
A good credit rating
A key technology
Valuable resources can be both tangible and
intangible
Resource-Based View (RBV)
Rarity
How common is the resource or capability in
question?
Rare resources are those that are relatively
uncommon among competitors
Rareness adds to value
Resource-Based View (RBV)
Inimitability
Advantage from valuable and rare resources will diminish if
imitated by competitors
Diffusion of key capabilities can undermine competitive
advantage
Outsourcing can yield benefits. However, while the savings
from outsourcing are appealing, it is important to consider
the long term implications for imitability and rarity
Understanding what is or is not an effective imitation means
understanding the nature of the value that the product or
service provides
Is Dr. Thunder a good imitation of Dr. Pepper?
Resource-Based View (RBV)
Non-Substitutability
Imitation can be difficult (or even illegal)
Thus, it can makes sense to substitute it with some
equivalent resource
The ability to substitute the value generating
function of a resource reduces its value and its
ability to sustain competitive advantage
A Company’s Resources and Capabilities Must
Be Managed Dynamically
Management’s organization-building challenge has
two elements:
1. Attending to ongoing recalibration of existing
capabilities and resources
2. Casting a watchful eye for opportunities to develop
totally new capabilities for delivering better customer
value and/or outcompeting rivals
A dynamic capability is developed when a company has become proficient in
modifying, upgrading, or deepening its resources and capabilities to sustain
its competitiveness and prepare it to seize future market opportunities and
nullify external threats to its well-being.
Let’s take a 5 minute break
SWOT Analysis
SWOT represents the first letter in:
Strengths Weaknesses Opportunities Threats
A well-conceived strategy is:
Matched to the firm’s resource strengths and
weaknesses
Aimed at capturing the firm’s best market
opportunities and defending against external
threats to its well-being
SWOT Analysis
Identifying Internal Strengths
What are the resources and capabilities within a firm
that make it more competitive?
A firm’s strengths determine whether its competitive
power in the marketplace will be impressively strong or
disappointingly weak
A firm that is well endowed with strengths stemming
from potent resources and core competencies normally
has considerable competitive power
SWOT Analysis
Identifying Internal Weaknesses
What are the factors within a firm that limit or
restrict its competitiveness in the market?
Deficiencies in competitively important physical,
organizational, or intangible assets
Missing or competitively inferior capabilities
in key areas
SWOT Analysis
Identifying External Opportunities
What are factors in the environment that present
opportunities to the firm?
Good match with its financial and
organizational resource capabilities
The best prospects for growth and profitability
The most potential for competitive advantage
SWOT Analysis
Identifying External Threats
What are factors in the environment that present
threats to the firm?
Can vary from moderate to critical
Occur in a firm’s immediate industry, another industry, or
in the larger macro-environment
SWOT Analysis
The value of a SWOT analysis is in:
Drawing conclusions from the SWOT listings about the
firm’s overall situation
Translating these conclusions into strategic actions to:
Better match the firm’s strategy to its strengths and market
opportunities
Correcting problematic weaknesses
Defending against worrisome external threats
Constraints Analysis
A constraints analysis helps identify root causes
of problems that restrict an ideal outcome
Simple process
1.
Identify problems that you believe restrict the outcome
2.
Draw causal arrows from one problem to another if you believe that
they are causal
3.
Identify the root cause(s); the problems that have no arrows pointing
at them are root causes and should be dealt with first
Constraints Analysis
Cause A
Cause D
Cause B
Problem
Cause C
Cause E
Cause F
Cause G
Question 3: Are the Company’s Cost Structure
and Customer Value Proposition Competitive?
Why are cost structure and value important?
Important to keep a firm’s costs inline with
competitors
Allows for more appealing value propositions
Useful analytical tools:
Value chain analysis
Benchmarking
The Value Chain
The Value Chain
A tool for decomposing the value generating
activities of an organization.
Term reflects that at each step, the product or
service becomes more valuable
The value chain is based on a simple but powerful
idea, that the value customers see and the value
that leads to profits result from a series of distinct
but interconnected activities.
A Representative Company Value Chain
The Value Chain
Primary Activities: actions that are directly
involved in creating and distributing goods and
services
Inbound Logistics—the arrival of raw materials
Operations—the actual production process
Outbound Logistics—the movement of finished
products to customers
Marketing & Sales—work to attract customers and
convince them to make purchases
Service—the extent to which a firm provides
assistance to their customers
The Value Chain
Support Activities: structures that provide
underlying support primary activities
Firm Infrastructure—how the firm is organized
(structure)
Human Resource Management—involves the
recruitment, training, and compensation of
employees
Technology—use of computerization and
telecommunications to support activities
Procurement—process of negotiating for and
purchasing raw materials
The Value Chain
Value chain analysis can be used to systematically
breakdown the costs of producing a firm’s market offerings
This can be used to identify where adjustments are
necessary
Benchmarking
Benchmarking is a tool for learning which firms are best at
performing particular activities and then using their techniques
(or “best practices”) to improve the cost and effectiveness of a
firm’s own internal activities
Entails making cross-company comparisons of how certain
activities are performed and the costs associated with:
How materials are purchased
How inventories are managed
How products are assembled
How customer orders are filled and shipped
How maintenance is performed
Combined with value chain analysis, these two tools can help a
firm identify what parts of the value chain can and to what
extent should be improved
The Value Chain System
for an Entire Industry
A firm’s customer value proposition and cost competitiveness also depend
on the value chain activities of its suppliers and forward channel allies
Managers must understand an industry’s entire value chain system for
delivering a product or service to customers, not just the firm’s own
internal value chain
There are three main areas of a firm’s overall value chain where cost
differences occur:
Activities performed by suppliers
A firm’s own internal activities
Activities performed by forward channel allies
Representative Value Chain for an Entire Industry
Remedying a Supplier-Related
Cost Disadvantage
Pressure suppliers for lower prices
Switch to lower-priced substitutes
Collaborate closely with suppliers to identify
mutual cost-saving opportunities
Integrate backward into business of high-cost
suppliers
Remedying an Internal Cost
or Value Disadvantage
1. Implement the use of best practices throughout the firm
2. Eliminate some cost-producing activities by revamping value chain
3. Relocate high-cost activities to lower-cost geographic areas
4. See if certain internally performed activities can be outsourced to vendors
or contractors
5. Invest in productivity-enhancing, cost-saving technology
6. Find ways around activities or items where costs are high
7. Redesign the product and/or its components to reduce manufacturing or
assembly costs
8. Make up differences by reducing costs in supplier or forward portions of
value chain system
Remedying a Cost Disadvantage Associated
with Activities
Performed by Forward Channel Allies
Pressure dealer-distributors and other forward
channel allies to reduce their costs and markups
Work with forward channel allies to identify win-win
opportunities to reduce costs (synergize)
Change to a more economical distribution strategy:
Switch to cheaper distribution channels
Integrate forward into company-owned retail outlets
Question 4: What Is the Company’s Competitive
Strength Relative to Key Rivals?
Determining a firm’s overall competitive
position involves answering two questions:
1. How does the firm rank relative to its
competitors on each industry key success factor?
2. Does the firm have a net competitive advantage
or disadvantage vis-à-vis its major competitors?
Question 5: What Strategic Issues and Problems
Must Be Addressed by Management?
Final and most important analytical step
in assessing “Where are we now?”
Using analyses, pinpoint the issues and problems that
management must address
This helps to set an agenda for working to improve a
firm’s performance and competitive position
Results of such analyses combine with external analyses
and inform the other steps in the strategic management
process